NSC/DEPUTIES COMMITTEE MEETING POLAND

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP90M01243R001000100003-7
• Release Decision: RIPPUB
• Original Classification: T
• Document Page Count: 56
• Document Creation Date: December 23, 2016
• Document Release Date: September 16, 2013
• Sequence Number: 3
• Publication Date: September 21, 1989
• Content Type: REPORT

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DDCI
NSC/DEPUTIES COMMITTEE MEETING
POLAND
Thursday, 21 September 1989
1115-1215
(Rm. 208, 0E0B)
DDCI
NSC/DEPUTIES COMMITTEE
POLAND
Monday, 25 September 1989
1000 - 1100
WHSR
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United States Department of State
Economic Reform in Poland:
Status and Prospects
September 1989
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United States Department of State
Economic Reform in Poland:
Status and Prospects
September 1989
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Summary
Economic Reform in Poland:
Status and Prospects
The new Solidarity-led government of Premier Tadeusz Mazowiecki
has inherited an economy in crisis. In addition to the immediate problems
of consumer goods shortages and inflation, economic performance
suffers from formidable problems of industrial obsolescence, weak infra-
structure, bad management, and low labor productivity. The stifling
system under which Poles have labored for decades?and which they
now have the opportunity to change?has left goods noncompetitive
in export markets, limiting Poland's ability to modernize through imports
or to service its crushing $39 billion debt.
Poland's economic plight has many roots?in the characteristic short-
comings of centrally planned economies; in mismanagement of develop-
ment and import strategies; in efforts to placate worker unrest stem-
ming from worsening living conditions; and in the shortcomings and
inconsistencies of economic reform efforts of past Communist re-
gimes. However, Poland is now laying the groundwork for dramatic new
progress.
The new government has announced its intention of making economic
stabilization its highest priority. Among its immediate tasks are bolstering
food supplies and reining in the state budget. Success on these fronts
will help garner worker support for economic reform measures that un-
derstandably will also mean uncertainty and hardship. The reforms
also offer Poland a chance for improving living standards and?more im-
portant?for nourishing the seeds of democracy recently sown in Po-
land. At the same time, Poland also has to move quickly on developing
an economic recovery program with the IMF.
In the long run, Poland faces the challenge of revitalizing and restruc-
turing its obsolescent economy and restoring its international
creditworthiness, while avoiding a further deterioration of living stan-
dards likely to jeopardize stability. Solidarity has said it intends to push
forward a comprehensive package that reforms or privatizes state in-
dustry while encouraging new private industry?both foreign and domes-
tic?as well as agricultural expansion. Poland must increase hard cur-
rency exports, develop capital markets, and encourage domestic
savings.
111
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The ability of the Mazowiecki government to retain good will, build
public confidence, and convince the Poles that its reforms are more than
just another set of consumer price hikes is crucial to its chances for
success. The timing of reforms will be important if Mazowiecki is to avoid
the mistakes made repeatedly by previous regimes. The government
must lay the groundwork for a systematic reform of state-sector industry
before moving too quickly to greater reliance on market mechanisms.
Critical elements of this process will be dismantling central ministries, se-
curing enterprise management compliance with reforms, legislating
unemployment benefits, and privatizing at least part of state industry.
Mazowiecki also must be able to point to widespread support from the
West in his efforts; most Poles realize that any significant restructuring of
the economy will require infusions of financial and technical assistance
that only the West can provide. Ideally, such aid should be linked to re-
form progress, both to avoid a repeat of Poland's borrowing mistakes
of the 1970s and to help the new government justify any attendant hard-
ships for workers and consumers.
iv
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Contents
Page
Summary
iii
Overview of Poland's Economic Performance
1
A Sector-by-Sector Evaluation of the Economy's Problems
1
Industry?the State Sector
1
Industry?Private Enterprise
3
Agriculture
3
Foreign Trade
5
The Evolution of Poland's Economic Problems?A History of Failed Reforms
6
1981-86: The "First Stage" of Economic Reform
7
1986-88: The "Second Stage" of Jaruzelski's Economic Reform
8
1988-89: Rakowski's Reform Efforts: Promising Beginnings...
8
And Ultimate Failure
9
Lessons for the New Government
9
What Poland Needs To Do
9
Immediate Measures
9
Midterm Measures
10
Long-Run Perspective
11
The Role of the West
11
Immediate Needs
12
Midterm Needs
12
Long-Run Needs
12
Perspective
12
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Selected GNP
Indices, 1980-88
Index: 1975.100
Real GNP Growth,
1980-88
Percent
II=a? 4C:10 An\ II ?=80
1. Selected Growth Indicators
130
120
100
90
11[111[11
80 1980 81 82 83 84 85 86 87 88
4
2
0
li
-2
_
-6
1980 81 82 83 84 85 86 87 88
vi
Agriculture
Overall
Industry
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?
Economic Reform in Poland:
Status and Prospects
Overview of Poland's Economic Performance
Poland's economic performance in the 1980s has been
weak, and the decline has worsened in 1989. Real per
capita income remains 10 percent less than a decade ago,
and growth in the 1980s has brought output back only to
the levels preceding the 1980-81 crisis. Inflation, spurred
by price hikes last year and two subsequent waves of
strikes, has risen from 70 percent annually at the beginning
of 1989 to nearly 200 percent annually by midyear.
Industrial output in the first half of 1989 was up only 1
percent and actually declined in the second quarter. Food
deliveries appear to have increased this year, but panic
buying and hoarding spurred by fears of even greater
inflation have kept store shelves bare. The decontrol of
food prices on 1 August propelled consumer prices upward
and triggered further strikes, often for 100-percent pay
increases, despite legislation promising to compensate
workers fully for higher food costs.
A survey of financial macroeconomic indicators shows
that:
? The state budget deficit has skyrocketed and now is
nearly 55 percent of total revenues. The 1988 deficit was
200 million zloty; 1989's budget forecast a 1-trillion-zloty
deficit; by May the deficit had reached 2.7 trillion zloty
and even recent official forecasts for a 6-trillion-zloty
deficit?in real terms, about triple the original forecast?
now appear optimistic.
? Poland's money supply jumped over 60 percent in the
first five months of 1989, from 2.7 trillion zloty to 4.4
trillion, as government expenditures ballooned?espe-
cially on consumer goods subsidies?while revenues fell
behind schedule; enterprises struggling with new tax
schedules and increased wage demands are increasingly
behind on their taxes.
As a result, the value of the zloty has fallen dramatically in
1989. The official exchange rate rose from 503 zloty to the
dollar in January to 1,350 in September. Although private
sales of foreign currency have been legalized, the Decem-
ber 1988 black-market rate of 2,000 zloty to the dollar gave
way by September to a commercial rate of 1,100 zloty to
the dollar. The dramatic fall of the zloty has encouraged
panic buying and hoarding as people buy hard currency
and consumer goods as hedges against inflation.
A Sector-by-Sector Evaluation of the Economy's
Problems
Poland's economic performance reflects the problems rife
in virtually every economic sector. Industry is obsolescent,
agriculture is constrained by a lack of inputs, trade is too
low to finance modernization through imports, and private
enterprise (outside of farming) and foreign investment are
still too small to make a dent in Poland's economic
problems.
Industry?The State Sector
Stalinist development strategies led to the development of
a large state-owned manufacturing sector that produces
94 percent of Poland's nonagricultural output. Much of
Poland's industry is concentrated in obsolete heavy indus-
try. Most sectors are characterized by a handful of large
enterprises?there are only 2,300 state enterprises in
Poland, with as many as 10 establishments each?
operating out of outdated factories that are extremely
wasteful, are often heavy polluters, and produce low-
quality goods uncompetitive on world markets. According
to the World Bank, Polish factories on average use 2.5
times as much fuel and power per unit of output as do their
Western counterparts. Moreover, declining investment
allocations have led to capital stock wearing out faster than
it can be replaced, and foreign exchange shortages limit
imports of modern technology and even spare parts. Some
plants have a net worth that is zero or negative by Western
calculations, but they are kept operating in order to meet
plan or trade commitments.
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Index: 1980=100
IF:21? 4C->
2. Per Capita
AtOrl
!Mil IMO
indices
Consumption
110
100
90
80
III!
V
_
iji
1
70 1980
81
82
83
84
85
86
87
2
Grains
Potatoes
Meat
Fish
Source: Polish
Statistical Yearbook
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Table 1
Poland: Wage Growth and Cost-of-Living Increases,
1981-88
Percent
1981
1982
1983
1984
1985
1986
1987
1988 ,
Nominal wage growth
27.3
51.3
24.5
16.3
18.8
20.4
21.1
84.4
Cost-of-living increase
24.4
101.5
23.1
15.7
14.4
17.3
25.5
74.0
Real wage growth
2.3
?24.9
1.1
0.5
3.8
2.6
?3.5
6.0
Per capita consumption
growth b
NA
NA
NA
4
4
2
2
2
, Preliminary.
b Of goods paid for out of incomes (net of subsidies) .
Source: Polish Statistical Yearbooks, statistical communiques.
State industry also is characterized by chronic and
concurrent underemployment and labor shortages, the
result of labor hoarding by factories more interested in
meeting plan targets than in minimizing production costs.
In 1988, for example, only 5,000 people were officially
listed as looking for work, even while the state listed
280,000 job vacancies. In most state plants, however,
many workers are idle much of the day. Education and
training are readily available, and workers are free to
change jobs, but Poland's housing shortages restrict labor
mobility.
Domestic investment in state industry has tended to
maintain heavy industry rather than to restructure the
economy. Investment historically has been shaped by
central planners and autonomous bureaucracies rather
than by interest rates and profit potential. Until the 1980s
most investment allocations came from direct grants from
the state budget that did not need to be repaid. Ministries
controlling the most physical assets?and which could
make the most persuasive case for new investment in order
to meet production targets?received the bulk of the
annual state budget's investment allocations. As a result,
Warsaw over the years has squandered considerable
money in building and maintaining heavy industrial facilities
of questionable worth.
The Poles readily acknowledge that a large part of the
industrial base should be scrapped, but there is no ready
substitute for what most of these plants produce. For
example, even though the huge Nowa Huta plant uses
3
inordinate amounts of energy supplies to produce steel, a
shutdown either would require hard currency imports of
steel well beyond what Poland can afford, or would mean
steel shortages for other industrial plants that may be more
efficient or productive.
Industry?Private Enterprise
Despite rapid growth in the 1980s the private sector in
Poland still contributes only a small share-6 percent?of
nonagricultural output. In addition to such traditional
nonindustrial areas of operation as handicrafts, trade, and
services, private enterprise now operates in such areas as
small-scale manufacturing, transport, and even computer
software and consulting. Poland's private-sector work
force (not including 4 million private farmers) increased
from about 600,000 in 1980 to just over 1 million by 1987,
according to official statistics.
Private industry's growth probably would have been
greater if not for numerous obstacles to its operation. Until
this year privately owned enterprises had been heavily
taxed and subjected to a 50-workers-per-shift ceiling on
employment. Private enterprise also has suffered from
bureaucratic obstacles?cumbersome registration and li-
censing procedures?and discrimination in favor of state
enterprises for goods and services in short supply.
Agriculture
About 80 percent of Poland's agricultural lands are
privately held?the result of failed collectivization efforts in
the 1950s?which is the highest proportion in the Soviet
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Hard Currency
External Accounts,
1980-88
Billion US $
Debt Coming Due
1989-95
(Principal Only)
Billion US $
II=1"4C210 A IV IC.
3. Selected External Financial Indicators
10
8
-6------....c.?........_______,...
_...........00,000.